Principles and Policy Options for Optimizing Income Distribution During 12th Five-Year Plan Period

2010-06-08

By Yu Bin & Chen Changsheng, Research Department of Macro-economy of DRC

Research Report No 142, 2009

Due to the falling proportion of workers' remuneration in national income distribution and the widening disparity in personal income distribution, China's personal consumption trend and consumption rate have plummeted in recent years. As a result, the GDP proportion of personal consumption in the country's final consumption and the contribution of consumption to its economic growth have been on the decline. Both the personal and government consumption rates are lower than the world average levels and are even visibly lower than those countries with the same income level. The imbalance between investment and consumption has become all the more conspicuous. The irrational distribution of national income has become an important constraint to the growth of personal consumption and the steady development of the economy. For this reason, how to adjust and optimize income distribution during the 12th Five-Year Plan period has become an important task for China to push forward economic restructuring and to change its mode of development.

I. Prominent Problems with China's Income Distribution Pattern

1. Workers' remuneration is unduly low in primary distribution

The GDP calculated according to the income method indicates the proportion of worker's remuneration in primary distribution dropped from 51.4% in 1995 to 39.7% in 2007 (Table 1). During this period, the adjustment of statistical parameters was one of the reasons. However, even if this factor is taken into account, the problems such as the unduly low proportion and excessively fast decline of workers' remuneration are still fairly prominent and are affecting the growth of personal consumption. The continuous rise in China's savings rate in recent years has been mainly a result of the rise in corporate savings, which has risen to over 20% from the 13.3% in 1992. To some extent, personal income rather than personal consumption has gone down.

Table 1 China's GDP Composition (%) Based on Income Method

Year

Workers’remuneration

Fixed assets depreciation

Net production tax

Operational surplus

1995

51.4

13.0

12.3

23.3

2000

48.7

14.1

15.3

21.9

2005

41.4

14.9

14.1

29.6

2006

40.6

14.2

14.6

30.7

2007

39.7

14.8

14.2

31.3

Source: China Statistical Yearbook.

International comparison indicates that the proportion of workers' remuneration in China in primary distribution is clearly lower than developed countries but its corporate surplus proportion is visibly higher than developed countries. The GDP share of workers' remuneration in the major world economies has ranged between 50%~57% in recent years, or about 10~17 percentage points higher than China's 39.7% in 2007. On the other hand, the GDP share of corporate operational surplus in those countries has ranged between 20%~25%, or 6~11 percentage points lower than China's 31.3% in the same year.

Source: OECD database and United Nations National Accounting Yearbook.

2. Inequity in income distribution leads to widening income disparity

The widening income disparity between urban and rural areas, between industries and between different social groups and the conspicuous inequity in income distribution have become the problems in China's income distribution that have triggered the strongest public reaction.

(1) The urban-rural disparity has been an important reason for China's widening disparity in income distribution. In recent years, the Chinese government has attached great importance to the issues of agriculture, countryside and farmers by introducing a host of policies to support and benefit them. As a result, the widening of the urban-rural disparity has been somewhat contained. In 1985, the per capita disposable income of the urban residents was 1.86 times the net income of the rural residents. The ratio rose to 2.71 in 1995 and 3.33 in 2007, and dropped slightly to 3.31 in 2008. The Gini Coefficient, measuring income distribution, has gone up slightly for both urban and rural residents in recent years, but has been clearly lower than both 0.4 and the national level. This indicates that China's disparity in personal income distribution continues to reflect the urban-rural disparity by a big margin.

(2) The inter-industrial income disparity has become growingly serious. In the early years of reform and opening up, China's income disparity between different industries was not serious, with the highest being 1.8 times the lowest. But the ratio later became wider, reaching 2.63 in 2000. The statistical data of the Ministry of Human Resources and Social Security indicate that the average wage of the workers in the industries of electricity, telecommunications, finance, insurance and tobacco was 2~3 times higher than that of other industries. If extra-wage income and welfare benefits are included, the real income disparity could range between 5~10 times. In addition to the reasonable factors such as industrial features and technological intensity, the inter-industrial income disparity is mainly caused by the monopolistic factor.

Table 3 Changes to Personal and Government Disposable Incomes after Secondary Distribution (%)

Year

Personal income growth (%)

Government income growth (%)

Year

Personal income growth (%)

Government income growth (%)

1992

0.2

18.3

1999

3.7

9.2

1993

0.6

13.4

2000

1.3

15.1

1994

0.9

12.7

2001

1.1

13.6

1995

0.6

12.4

2002

0.9

15.6

1996

0.3

9.7

2003

0.4

18.7

1997

0.6

8.1

2004

1.4

13.5

1998

4.2

4.2

2005

0.8

15.9

Source: Based on China's published fund flow statements (1992~2005).

(3) The income regulatory effect of the secondary distribution is intangible. The result of the secondary distribution indicates that there has been no major change between the personal income from the primary distribution and the final disposable personal income. The income of the personal sector has failed to improve visibly, and income regulation has mainly been transferring corporate income to the government sector (Table 3). Meanwhile, China's Gini Coefficient has continued to rise, from 0.35 to 0.45 in the 1990~2005 period and further to 0.48 in 2008, with the income of the highest 20% income group being 8.3 times that of the lowest 20% income group. This indicates that the secondary distribution has failed to aggregately improve the income of the personal sector or to structurally narrow the income disparity. It has only slightly slowed the widening of income disparity.

3. Public service spending accounts for an unduly low proportion of total government spending

International experience indicates that the proportion of public service spending in total government spending gradually goes up along with the rise in a country's development level (Table 4). It is particularly so when the per capita GDP ranges between US$3,000~10,000. As personal consumption gradually shifts from durable goods consumption to service consumption, public services should account for a visibly higher proportion of total government spending. Take education, medical care and social security, the three main public services, as an example. The average international growth is as high as 13 percentage points. Specifically, the spending on education is relatively stable, but the spending goes up by 4 and 10.7 percentage points respectively for medical care and social security. When the per capita GDP exceeds US$10,000, the ratio of government spending on public services will gradually stabilize.

Table 4 Relations between Government Public Service Spending Proportion and Per Capita GDP (%)

Per capita GDP (US$) Group

Medical care’s proportion in government spending

Education’s proportion in government spending

Social security’s proportion in government spending

Total

0~3000

8.7

13.2

20.8

42.7

3000~6000

12.2

12.6

29.2

54.0

6000~10000

12.7

11.4

31.5

55.7

10000~20000

13.8

12.9

27.7

54.4

>20000

13.4

12.7

32.7

58.9

China(2007)

4.0

14.3

10.9

29.2

Source: IMF and China Fiscal Yearbook.

Overall, China's government spending on public services is still inadequate despite intensified inputs in recent years. In 2007, the three public services of education, medical care and social security together accounted for only 29.2% of the total government spending. Compared with the countries with a per capita GDP of less than US$3,000 and the countries with a per capita GDP of US$3,000~6,000, China's ratio was respectively 13.5 and 24.8 percentage points lower. Specifically, the proportion of medical care spending was respectively 4.7 and 8.2 percentage points lower and the proportion of social security spending was respectively 9.9 and 18.3 percentage points lower. China's spending on medical care and social security is grossly inadequate, being only slightly higher than that of India among major economies. China's government spending on education is noted for uneven resource distribution, though the total educational spending is relatively high.